A good soundbar will beat a cheap theater in a box any day of the week. That being said, a modest 2 channel system if you can afford the space will slaughter most soundbars that are out there and will give you the option of listening to music with good sound as well. For under $500 I would think that you could get something like an NAD/Paradigm system that would do a nice job without breaking the bank. Buying used would allow for something better of course.
All that being said, almost anything will beat the sound of a flat panel TV, there just isn't enough room in there to do justice to the audio portion. Also, make sure that if you go the stereo route rather than surround that your DVD player and cable/satellite box are set for stereo out and not surround if possible.